NETHERLANDS - ABP pension fund is now the largest institutional investor in the innovative asset class of emission rights as its total allocation to carbon trading is €500m.
The scheme expects to profit from the first mover advantage on emission rights, which fits in its long-term portfolio, Frank Asselbergs, manager of ABP's portfolio manager stated in the scheme's magazine ABP World.
"The correlation with equity and fixed income is low, while the correlation with polluting commodities like oil and coal is negative, which is beneficial to the balance in the energy part of the commodities portfolio," he explained.
ABP takes part in the European Emission Trading Scheme (ETS), which is based on the Kyoto agreement and aimed at reducing by 2013 the emissions of greenhouse gases to 5% under levels seen in 1990.
European countries distributed the emission rights - initially for free - among the most polluting companies but companies that manage to drive down their emissions can then sell on their rights to the avoided emissions.
According to Asselbergs, emission rights can also originate from emerging countries, such as China, where a cut in emissions is cheaper to achieve. Specialists companies which, for example, make power plants cleaner sell their rights to European companies, he pointed out.
Aside from this, however, projects in emerging countries need UN approval before the rights can be sold on, he stressed.
"In addition, UN information provides an insight in the reliability and effectiveness of companies," said Asselbergs.
ABP's asset management arm is also active in the emission rights market by investing mainly in funds and companies involved in projects in emerging countries, according to Asselbergs who said "we the profits when these funds sell rights".
ABP Asset Management last year invested €363m in the Carbon II Fund of British bankers group Climate Change Capital, which invests in clean energy and a low carbon economy in mainly developing countries.
Besides these indirect investments, ABP also takes up direct positions on the European Climate Exchange (ECE) now and then, Asselbergs added.
The commodities manager acknowledged the volatility on the ECE, but underlined daily trading holds a mainly speculative character.
"The projects in which ABP invests have a long-term horizon. However, there is always the risk that projects fail, or that an emission reduction doesn't get UN approval," he added.
According to Asselbergs, the main uncertainty is the political decision-making.
"For example, the EU issued too much emission right initially, which caused the process to shrink," he continued.
"The market expects the European Commission not to make this mistake again for the second Kyoto phase, from 2008 to 2013. However, it is crucial that the EC is consistent during periods of economic headwind".
An ABP spokesman declined to provide information on the expected returns on emission rights and said "plans to extend the investments will depend on the opportunities".